Accenture Banking 2020 POV

8/10/2019 Accenture Banking 2020 POV

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Banking 2020As the Storm Abates,

North American Banks Must

Chart a New Course to Capture

Emerging Opportunities


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As challenging as thecurrent operating

environment is, we believethe banking sector in 2020is a land of opportunity


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For North American banks, the storm haspassed, but theyre still taking on water.Five years after the global financial crisis,many banks have made significant stridesto recover, but they are struggling togenerate sustainable organic growth and

return to pre-crisis profit levels. Goneare the 20 percent-plus rates of pre-taxreturn on equity (RoE). In the currentenvironment, some are still straining toachieve profitability levels above their costof capital. As a result, they cannot easilyand consistently create shareholder value.

Unfortunately, the next decade doesnt lookto be any easier. A number of emergingtrendsincluding digital technologyand rapid-fire changes in customerpreferencesare threatening to weighdown those full-service banks that limit

themselves to products and services thatget distributed primarily through physicalchannels, particularly branches. Given thescale of these disruptions, our analysisshows that full-service banks, as a group,could lose about 35 percent of their marketshare by 2020.1Who gains this marketshare? Digitally oriented disruptors thatare far more agile and innovativetheequivalent of speedboats competing againstschooners. Some of these will be newentrants to the market, and others will be

todays full-service banks that revamp theirbusiness modelsor some parts of theirorganizationby streamlining operations tobetter meet consumer needs.

However, as challenging as the currentoperating environment is, we believethe banking sector in 2020 is a land ofopportunityprovided that banks trimtheir sails to better adjust to emergingheadwinds. In fact, banks that can match

the agility and innovation potential of otheindustries could consistently reap pre-taxRoE levels as high as 18-25 percent by2020. That represents a huge jump over theaverage 11 percent Pre-Tax RoE the largestbanks in North America managed at theend of 2012 (see Exhibit 1).

EXHIBIT 1Agility and innovation are becoming critical for banks, and high performers can regain ROE levels as high as 18-25 percent.

Pre-Crisis

Pre-Tax Core RoE %

High Performers ofthe Future

Average Performers

Status Quo(continuedoptimization and

simplification only

Not Sustainable)

Crisis Recovery Era of ConvergentDisruption

24.2%

19.9%21.3%

24.8%

20.3%20.8% 20.5%

13.3%

-3.3%

3.2%

8.5%9.8%

+1.1%

-5%

0%

5%

10%

15%

20%

25%

30%

2000 2002 2004 2006 2008 2010 2012 2020

+2.4%

+3.5%

+1%

12%

+3.4%18%

+2.5%

25%

Optim

izationand

Simp

lification

Agility

Innovation

11.0%

2013 Accenture. All rights reserved

Source: Accenture Research Analysis Using SNL Financial Data. Historical, Current and Projected Financial Performance of TodaysTop 22 NA Banks With >$50bn in Assets


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What makes the current environment sochallenging is a set of disruptions thatcurrently impact banks from all sides,a phenomenon that we call convergentdisruption (see Exhibit 2.) Externally, newcompetitors are quickly emerging in themarketoften from outside the traditionalbanking sectorcreating new threats fortraditional full-service providers. At thesame time, ongoing convergence betweenbanks and other players, in areas like

payments, telecommunications and retail,is creating new competition and innovativeways to do business.

Regulations are a factor as well. New ruleswill increase capital requirements and costthe average bank 2.5-3.5 percent in pre-tax RoE. A grim economic outlook for thenext few yearswith the Federal Reserveaiming to keep benchmark interest ratesat historically low levelswill prolong theindustrys current headwinds. New entrants,once regulated, may not survive if they fail

to price for the impact of regulations early.And consolidation will continue to play outbetween now and 2020, by which point weestimate that 15 to 25 percent of todaysroughly 7,000 North American financialinstitutions could be gone.

Most notably, digital shiftsboth insideand outside of the industryare rapidlyredefining information flows and theway that service providers and customersinteract, while dramatically cuttingdistribution costs to unprecedented levels.

Digital banking is becoming essential.Consumers view online banking as thesingle most important area in which banksshould invest and develop. Meanwhile,mobile banking activity has increased nearly50 percent since 2012 (see Exhibit 3).

The Era of Convergent Disruption

EXHIBIT 2Disruptive factors are impacting banks from all sides.

EXHIBIT 3Where consumers believe their primary bank providers should be investing.

Inside Outside

StructuralChange

CustomerEmpowerment

EmergingNew

Entrants

OngoingIndustry

Convergence

DigitalInside and

Outside

ExpandedRegulation

SubduedEconomicOutlook

ContinuedConsolidation

2013 Accenture. All ri hts reserved


Source: Accenture 2013 US Retail Banking Survey

Mobile Banking 20%Mobile banking has increased nearly

50% since 2012.

Social Media 7%

Call Center 12%

ATM 21%

Branch 38%

Online Banking 43%

Traditional Digital


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Social media is also changing the way peoplebuy and sell, potentially relying less ontraditional bank advisors and more on friendsand others who offer advice through digitalplatforms. Technology tools (e.g., tabletsand smart phones) and greater transparency

regarding pricing and services areempowering customers like never before. Asa result, large full-service banks run the riskof being outmaneuvered by digitally orientedcompetitors. Placing their strategic focuson best serving customers, these emergingcompetitors operate and adapt more quickly,creating new tools and services that quicklybecome the industry standard.

The focus on digital, like the othertrends, represents both a threat and anopportunity. The era of physical scale

is over, and banks can no longer winthrough size and operational footprintalone. Instead, leaders will win byfinding innovative ways to improve thecustomer experience and adapting tomarket changesthey will feature bothscale and flexibility. The current era ofconvergent disruption may ease in time,but permanent volatility will increasinglybecome the norm. This volatility in theexternal environmentmarked by factorsin the external environment such as an

unstable housing market, interest rates,and economic and market cyclesisseverely impacting the banking industry,creating risks for slow-footed banks butopportunities for those that can becomemore agile and innovative.

Specifically, we think that three newbusiness models will emerge to take marketshare away from traditional, full-servicebanking institutions that fail to adapt:

Niche Digital Provider

Digital, Full-Service Bank

Big Box Bank

A few of todays full-service traditionalproviders will have the foresight andfinancial and operational wherewithal toevolve from their existing market position

While banks are currently in anextremely dynamic operatingenvironment, other industries haveundergone similar disruption, andwinners have emerged. In some casestraditional players completely redefinedthemselves to remain relevant, whilein other cases new entrants tookdominant roles as they revolutionizedthe customer experience in the gapsthat traditional players left unoccupied.

For example, the telecom industry hasbeen upended in the past 20 years bynew technology, evolving consumerpreferences, and industry convergence.And like banking, telecom is heavilyregulated. Traditional providers likeAT&T have been forced to evolvesignificantly, through divestitures,mergers, and restructuring. Yet AT&Tis the largest communications holdingcompany in the world, with revenuefrom wireless, wifi, high speed Internet,voice and cloud-based services.Meanwhile, new telecom entrantslike Skypeowned by Microsofthavecarved out a profitable niche as well.

The Telecom Parallel

Skype now handles a significant portionof the worlds global phone traffic.And the convergence between mediaand cable have allowed a company likeVerizonitself once part of AT&T duringthe Ma Bell periodto soon beginairing National Football League gamesover its customers smart phones.2

The telecom industry offers severalclear lessons. First, digital technologyaccelerates the pace of change, all but

requiring players to become more agilein order to continually adapt. Second,the era of scale, particularly physicalscalei.e., winning through size aloneis over, and today, leaders win byfinding innovative ways to improve thecustomer experience. Last, innovationis keycompanies that fail to innovateand adjust to industry disruptions willmiss key opportunities for growth.

into one of these models. Others will beginmaking the required investments to alsomove in that directionadvancing theirexisting business models to effectivelycompete with new competitors.

Those that do nothing and try to cling tothe status quo risk losing significant marketshare and leave themselves vulnerable to apotential acquisition by the nimbler banksthose that we envision in this paper.

Although convergent disruption challengesbanks, it also opens significant opportunityto those who take advantage of the highlydynamic environment.


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To avoid being marginalized, traditionalbanks must take three distinct steps togive themselves a sustainable advantage in2020: 1) optimization and simplification,2) agility, and 3) continuous innovation(see Exhibit 4).

A Course for Profitable Growth

Exhibit 4

Three building blocks would give banks a sustainable competitive advantage by 2020.


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Todays baseline:Driving efficiency throughoptimization and simplification

Almost all banks are already taking stepsto optimize and simplify their business,in order to drive efficiency across theorganization. For example, they areeliminating redundancies; improvingprocesses and technologies acrossbusiness units, products, and operations;and managing regulatory requirementsmore effectively. However, while these

measures are worthwhile, they arenot enough to provide a sustainablecompetitive advantage. Instead, theyare the new baselinethe table stakesrequired for banks to merely maintaintheir current position, not improve it.We believe that most banks are currentlyoperating at this stage.

2020 table stakes:Adapting through agility

Very few banks have already achievedthe level of agility that will be neededto outperform in 2020. Moving forward,if banks are to identify and seize newopportunities, it is critical to adopt amindset of agility, allowing them to managechange quickly. Agility is not merely asynonym for digitalit also includes mobile

platforms, social media, and analytics. Forexample, banks should transform their ITplatform to overcome the constraints oflegacy technology in the back office, andempower an analytically driven front office.Robust analytics should be embedded in allprocesses throughout the organization.

Banks should also become far morecustomer-driveninstead of product-drivenmaking decisions to improve theirofferings and proactively meet customerneeds. And they should shift their mindsetfrom managing unit costs to managing

units consumed. Yet in the long term,agility itself is not the goal either. Thisbuilding block will allow banks to succeed,but we anticipate that agility will be thetable stakes of 2020the new baseline.

Leadership in 2020: Differentiatingthrough continuous innovation

The highest performing banks in 2020 willdifferentiate through innovation. ManyNorth American banks currently innovate,but not on a consistent basis across theorganization. By 2020, the industry leaderswill separate themselves from the packthrough continuous innovation across theenterprise. That means they will have theideas, vision, and leadership to not onlystay ahead of the market, but to actually

reshape it, likely in the context of a broadervalue chain than envisioned today.

IT as an enabler

Technology is critical to this progression,its effects as profound as adding steampower to a sailing ship. At the first buildingblockoptimization and simplificationbanks need to invest in capabilities such asdigitizing their finance and HR functions,along with logistics and operations, tomake them more responsive to the shifting

requirements of a dynamic market.

At the second building blockagilitybanksneed to rebuild their IT platforms outside-in, rebooting outdated legacy systems tobetter leverage digital technology in theirback office (to make operations moreefficient) and to power an analytically

driven front office. Virtualizing the banksnetwork, along with strong capabilitiesin data analytics and mobility across thedistribution spectrum will be crucial as well

At the third building blockcontinuousinnovationbanks will need to build theirbusiness around technology as an enablingtool for generating new ideas and insightsacross the enterprise. They will also convertthese ideas into digital banking productsand services that can meet the evolvingdemands of customers. At all three stages,

the challenge for bank leaders is to balancethe innovation needs of the business withongoing scale and efficiency requirementsof the corporation.3

A clear path for success exists for NorthAmerican banks that choose to start now.


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A clear path for successexists for North American

banks that choose tostart now


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The banking industry today is comprisedof traditional full-service banks (whichmake up the vast majority of overallmarket share) monoline players and small/community banks. We think all three willsurvive and even thrive in the future.Small/community banks are likely toconsolidate, and monoline players will likelygrow in number, because of more nicheopportunities and specialization. But threenew banking models will emerge, which willhave the biggest impact on traditional full-service banks (see Exhibit 5).

There are more than 500 traditionalfull-service banks today with more than$1 billion in assets, comprising 85 percentof the current market space. Burdenedwith sizable infrastructure, they are notparticularly nimble. They generate businesslargely through physical channels, aproduct-focused approach, and aggressivemarketing to customers. When seeking todevelop new products, these banks oftenrely on proprietary, internal investments.

The Emerging Landscape ofOpportunity

By comparison, the digitally driven playersthat we see taking market share by 2020will operate from a different playbook.Rather than basing decisions arounda large network of physical locations,they will have the flexibility to expandtheir footprint via digital strategies, evenacross borders. (Some of them will likelystill have physical locationsinstead of a100 percent digital operationbut theywont rely on those locations as heavily as

traditional, full-service banks do today.)These agile, innovative banks will also bemore customer-centric, and organize theirbusinesses around customer segments,rather than around product categories. Last,instead of proprietary investments, theywill partner with other companies, both inand out of the banking industry, to leveragebest-in-breed innovation.

We project that traditional banks could losemore than one-third of their market shareby 2020, either to banks partnering withnew entrants (such as Google, Apple, orAmazon) or to adopters (current playersthat adopt new business models, suchas large banks today that become highlydigital and agile). Given this competitivethreat, it is critical for traditional full-service banks to proactively decide howbest to compete in order to protect and

grow their business.

To be clear, many traditional full-servicebanks will succeed by advancing theirexisting business models and combiningthem with superlative execution. However,we think three new models will also emergeas highly successful, competitive strategiesby 2020.


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EXHIBIT 5Agility and product commoditization expand the business models for success in the future.

Highly Agile

Potential Banking Landscape 2020

Less Agile

Specialized Large-Scale, Commodity Products


Most business generated throughonline/digital channels

Highly nimbleFlexible infrastructureSocial media an integral part of

strategyOptimized and simplifiedCustomer-centric

Most business generated throughtraditional, physical channels

Less nimbleHeavy infrastructureLess optimized and simplified

Focused products or limited geographic focusHighly customer-centricHigher priced

Advice-drivenHighly nimbleSimplified/optimized infrastructureNew entrantsCompete largely on advice and product

depth/differentiation

Commodity products (mass market focus)Product and customer centricLow price

Low amount of adviceNot very nimbleLarge, often legacy infrastructureLarger foreign entrants, but mostly

traditional playersCompete largely on price

* Market shares are based on

enterprise-level revenues

100+ Players~9% market share*(Ally, Amex, CIT,

Discover, Simple)

Small Banks

6,500+ players

~8% market share*

Current NewEntrants

3. Traditional Full-Service Banks500+ Players>$1B assets

~85% market share*(Bank of America,SunTrust, Zions)

Mid-Size Banks500+ players

~30% market share*

Universal Banks4 players

~55% market share*2.

M

ono-linePlayers

1.

Small/CommunityBanks

Current Banking Landscape 2013New Entrants and Adopters(Current Players who Adopt new Business Models


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First is a Niche Digital Provider, meaninga highly agile bank that offers extremelyspecialized products at scale. These playersbenefit from a flexible infrastructure anda strong emphasis on social media andmobile technology. They will competethrough a deep product offering, includingadvice. For example, a technology providercould collaborate with a large wealthmanagement firm to create a new jointventure that offers money managementservices and advice through digital channelsmore easily and cost effectively across

borders. While there are clear opportunitiesin this model, we estimate that it will belimited to a few dozen providers by 2020.

The second business model option is aDigital, Full-Service Bank, meaning highlyagile institutions that rely on technological

solutions to deliver a range of products.These banks will compete on the digitalexperience they can provide to customerswhile offering a broad product set withsome depth, similar to the products offeredby traditional, full-service banks today.They could be existing institutions (such aslarge, full-service banks that redouble theirinvestments in digital platforms and usethat opportunity to retire existing legacyplatforms) or new entrants (such as anestablished technology firm that moves intothe banking space).

Across both categoriesnew entrants andexisting playerswe believe that digital,full-service banks could make up about 15percent of the market in 2020, across fourto six institutions.

The third new business model in 2020is Big Box Banks, meaning those thatcompete largely on price and offercommodity products to mass-marketcustomers. Notably, big box banks canoperate with a range of agility levels.As with the second category, these canalso be existing banks (e.g., one of thetop four players in the current market) ornew entrants (such as a large retailer). Inboth cases, they will have the benefit ofimmediate market share and low pricingacross a range of products, making them

appealing to existing customers.

Needed upgrades within thetraditional model

We understand that a completetransformation to a new digital businessmodel is not realistic for many banks.They have too much institutional heritageand momentum tied to their existingmodel, and in many cases they may lackthe investment capital and risk-tolerancerequired. However, doing nothing as the

market undergoes such radical shifts meansthat this segment will lose market shareand experience a continued slowdown inrevenue growth. In addition, they will findthemselves competing against a wave ofnew upstart competitors, which will have abuilt-in financial competitive advantage inthe form of lower operational costs.

To meet this challenge, traditional full-service banks can succeed within theircurrent business model, provided theystrengthen specific capabilities in order to

become more agile. Specifically, they willneed to revamp their operations by 2020 tobecome more digital, truly customer-driven,omnichannel (allowing banks to interactwith customers through all available means,including new mobile technologies), andinnovative. The question is not whether thesechanges will need to happen but how fast.Early movers will have a clear advantage.

Implementing such measuresandexecuting at a best-in-class levelwouldallow these banks to achieve a higherlevel of profitability, and move themcloser to adopting a new business modelwithout undergoing a complete strategictransformation (see Exhibit 6). It is akinto a migration instead of a radical rebootof the institution, in which some businessunits will adopt key traits of the threenew emerging models. In fact, the rightapproach may be a custom solution inwhich different business models get

adapted for different business units,depending on the market requirements ofthat units customer base (see Exhibit 7).

Banks can succeed in any of these businessmodels; they simply need to chart thecourse today.


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EXHIBIT 6Six business models can be highly successful in 2020.

EXHIBIT 7Banks can apply different business models to different units within their overall structure.

Highly Agile

Potential Landscape 2020

Less Agile

Specialized Large-Scale, Commodity Products

5. Digital, Full-Service Banks4. NicheDigital

Providers

Industries Outside Banking

3. TraditionalFull-Service Banks

6. Big Box Banks


2.

BoutiquePlayers

1

.Small/CommunityBanks

Todays TraditionalFull-Service Bank

(Extreme) Example of a Potential Year 2020Traditional Full-Service Bank

Retail Banking

CommercialBanking

(Small and Midsize)

Wealth / AssetManagement

(Private Banking)

Corporate &Investment

Banking

EquipmentLeasing/Asset

Financing

Enterprise

Functions(e.

g.,

HR,

Finance,

Legal,IT

) Retail BankingBig Box Retailer

DigitalCommercial

Banking (Smalland Midsize)

Wealth / AssetManagement

(Private Banking)

Niche WealthManagerProvider

Corporate &Investment

Banking

BoutiqueTreasury

Enterprise

Functions(e.

g.,

HR,

Finance,

Legal,IT

)

The future bank ecosystem will

be comprised of networked

relationships with different

brands targeting different

customers with different pricing,

strategies and marketing

A traditional full-servicebank today has manyoptions for how to achievea sustainable competitiveadvantage by 2020

2013 Accenture. All rights reserved Partnership Opportunity


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Each of the three business models canapply innovative new approaches togo to market, allowing them to furtherboost returns.

1. Consortium/Utility Strategy Combine front and/or back officeswith other banks to reduce costs. Forexample, three traditional full-servicebanks can share human resource ortransaction processing services.

2. White-Label Strategy Offer frontand/or back office personnel, products,

and processes for others to sell undera different brand. A good example isa Starbucks Bank, which is run by atraditional full-service bank.

Go-to-Market Strategies

3. Product Expansion Strategy Offernon-traditional products in branchesand online to increase foot traffic,generate new revenue streams, andultimately increase revenues from corebanking products. A good example ishaving post office branches in existingbank branches (or vice versa), oroffering real estate agent services forpeople buying or selling homes.

No matter how banks undergo the journeyto sustainable competitive advantage,or what business model banks chooseto pursue, they should start to re-rigtheir ships for success today. The tablestakes will soon be much higher, movingfrom optimizing and simplifying theorganization today to truly becoming anagile business in 2020. That shift createsvery real opportunities for banks that canget ahead of their competitors, provided

The Future is Now

they make the proactive investmentsneeded to build the business. To capturethe emerging opportunities, traditionalfull-service banks must shift theiroperating philosophy from a product-oriented organization to a customer-driven organization able to engage withcustomers anywhere, anytime on theirterms. Most fundamentally, they mustembrace and integrate new technologies,channels, and strategies.

Given the scope of the disruptionsimpacting the market, institutions need tostart today if they are going to succeed inthe landing of opportunity that is banking2020. These measures are difficult but wellwithin the grasp of most traditional banks.Companies that prepare now have time ontheir side.


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Further Reading

New Size, New Shape, New Role:How Banks Can Rise to the GlobalTransformation Challengehttp://www.accenture.com/us-en/Pages/

insight-banks-rise-global-transformation-challenge-summary.aspx

Banking 2016: Accelerating Growthand Optimizing Costs in Distribution andMarketinghttp://www.accenture.com/us-en/Pages/insight-banking-2016-next-generation-banking-summary.aspx

The RE-banking Revolution: InnovativePractices for Banks to Improve CustomerEngagement

http://www.accenture.com/us-en/Pages/insight-re-banking-revolution-innovative-practices-banks-summary.aspx

Consumer Mobile Payments Survey:Driving Value and Adoption of MobilePaymentsConsumers Want Morehttp://www.accenture.com/us-en/Pages/insight-driving-value-adoption-mobile-payments-consumers-want-more-summary.aspx

References

1.We calculated lost market share byprojecting the impact if a few of thelargest traditional full-service banks wereto successfully assume one of the new

operating models prescribed in this paper.

2. Verizon, NFL Agree to Stream CBS, FoxGames on Phones in 2014, cbssports.com,June 4, 2013. Retrieved Oct. 1, 2013 fromhttp://www.cbssports.com/nfl/eye-on-football/22351385/verizon-nfl-agree-to-stream-cbs-fox-games-on-phones-in-2014

3. The CMO-CIO Disconnect: Bridgingthe Gap to Seize the Digital Opportunity,Accenture, 2013, http://www.accenture.com/us-en/Pages/insight-cmo-cio-

bridging-gap-seize-digital-opportunity-summary.aspx


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About Accenture

Accenture is a global managementconsulting, technology services andoutsourcing company, with approximately275,000 people serving clients in morethan 120 countries. Combining unparalleledexperience, comprehensive capabilitiesacross all industries and business functions,and extensive research on the worldsmost successful companies, Accenturecollaborates with clients to help thembecome high-performance businesses andgovernments. The company generated netrevenues of US$28.6 billion for the fiscalyear ended Aug. 31, 2013. Its home page iswww.accenture.com.

This document is produced by consultantsat Accenture as general guidance. It isnot intended to provide specific adviceon your circumstances. If you requireadvice or further details on any mattersreferred to, please contact your Accenturerepresentative.

This document makes descriptive reference

to trademarks that may be owned byothers. The use of such trademarks hereinis not an assertion of ownership of suchtrademarks by Accenture and is notintended to represent or imply the existenceof an association between Accenture andthe lawful owners of such trademarks.

13-3121U / 9-5913

For more information, please contact:

Wayne BuschManaging DirectorNorth America Banking [email protected]

[email protected] or visitwww.accenture.com/Banking2020

Copyright 2013 AccentureAll rights reserved.

Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.

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